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As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obivous Years Ago That This Industry May Become The “New” Tobacco Companies
In October, I posted The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. Time will tell if I am correct, but the trends are still moving in my favor. From Bloomberg:
JPMorgan Chase & Co. and the
biggest U.S. banks face billions of dollars in legal costs related to
their role in the financial crisis, threatening their profits and the
stock price gains they made in 2010, analysts said.
JPMorgan, the second biggest bank by
assets, reported $5.2 billion of legal costs in the first nine months of
2009, compared with a gain of $10 million in the same period a year
earlier. The costs would rise if the bank reserves for
multibillion-dollar lawsuits by Lehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.
… JPMorgan’s third-quarter net profit
of $4.4 billion, up 23 percent from the year earlier, would have been
larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits
and $1 billion for mortgage repurchases. Banks haven’t yet reported
their results for the fourth quarter.
Of course, there are a few tidbits missing from this statement that
can add to its accuracy. Let’s see… Where did those profits come from?
Again, you will find divergence between how BoomBustBlog reports and
that of mainstream financial reporting. See JP
Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of
Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be
When They Say XYZ Bank Can Never Go Out of Business!!! Sunday, October 17th, 2010
In a Nutshell,
JPM’s quarterly results were downright horrible – as we expected and
warned of in our previous quarterly analyses (see notes at bottom of
page)…
JP Morgan’s Q3 net revenue declined 11%
y/y (-5% q/q) to $24.8bn as investment banking revenue declined 18% y/y
(-9% q/q) to $12.6bn from $13.9bn in the previous year and net
interest income declined 2% y/y (-2% q/q, off of a combination of ZIRP
victimization and a rapidly shrinking asset base and loan book) to
$12.5bn versus $12.7bn in the previous year. Non-interest expense
increased 7% y/y (-2% q/q) to $14.4bn as compensation expenses to net
revenues remained broadly flat (28% vs 27.5%) while non-compensation
expenses to net revenues jumped to 33% vs 23% in the corresponding
period last year. As a result of “Fraudclosure” we expect this number
to skyrocket next quarter. Overall, the efficiency ratio (total
expenses-to-net revenues) increased to 60% vs 51% and we expect this
ratio to spike next quarter as well as the banking business becomes
even more expensive.
Click to enlarge…
However, despite a decline in
net revenue and increase in non-interest expenses (both of which
appear to be part of an obvious trend), profit before taxes was up 22%
y/y as provisions for credit losses were slashed by 60%.
JPM decreased its provision for credit losses despite no evidence of a
substantial, sustainable improvement in credit metrics (please
reference As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves). Provisions have lagged charge-offs for two consecutive quarters in a row.
As a result, banks allowances for loan
losses have decreased to 4.9% in Q3 from 5.1% in Q2 and 4.7% in
previous year. Although under provisioning has helped the bank to mask
its dearth in profits it has also materially undermined its ability to
absorb losses if economic conditions worsen. The Eyles test, a measure
of banks ability to absorb losses, has consequently worsened to 1.9%
in Q3 from 3.7% in Q2 and 5.9% in Q3 09.
JPM also increased its mortgage
repurchase reserves increased $1.0 billion pretax in anticipation of
pressures from GSE’s for repurchase of troubled mortgages and made a
provision of $1.3bn for litigation reserves. I explicitly outlined this
risk this time last year (Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results) and reiterated it days before JPM’s earnings release (The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!)
wherein I told BoomBustBlog readers to carefully follow the
“warranties and representations” numbers, which is nearly guaranteed to
spike – and spiked it has.
I would like to note that I don’t recall
anyone making a big deal about this topic when it first reared its head
last year, although the trend was quite obvious. Now, it is one of the
biggest issues of discussion in the earnings call Q&A. Was it
potentially my advice on watching the spike in the repurchase requests?
I do hope somebody was paying attention!
If you haven’t noticed, despite the fact
JPM is pulling provisions to, IMO, pad accounting earnings ahead of
what I feel to be a tsunami of macro and fundamental issues, they are
at the same time going to the capital markets for a re-up, and willing
to pay a premium to do so…
So, the question is, “Was JPM management correct in releasing
reserves ahead of what appeared to be improving credit metrics?”. After
all, said reserve releases do wonders for the bottom line, at least from
an accounting perspective which is what most investors pay attention
to. Well, now with the benefit of hindsight, we have a preliminary
answer to that question – that is assuming the collapse in housing
prices were the cause for drop in the first place. After all, the more
houses underwater, the riskier these mortgages are, right? Let’s peruse As
Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their
Downward Price Movement In Search Of Equilibrium Scraping Depression
Levels Tuesday, December 28th, 2010
Anyone who regularly follows me knows
that I have been adamant in disagreeing with any who actually assert
that the US has entered a housing recovery. The bubble was blown too
wide, supply is too rampant, with demand too soft and credit tighter
than frog ass. Today, the Case Shiller numbers have come out, and after
a few months of showing price increases, have come around full tilt to
reveal the truth!
From CNBC:
U.S. single-family home prices fell
for a fourth straight month in October pressured by a supply glut,
home foreclosures and high unemployment, data from a closely watched
survey showed Tuesday. AP The Standard & Poor’s/Case-Shiller
composite index of 20 metropolitan areas declined 1.0 percent in
October from September on a seasonally adjusted basis, a much steeper
drop than the 0.6 percent fall expected by economists. The decline
built on a revised decrease of 1.0 percent in September and took
prices down 0.8 percent from year-ago levels. It was the first
year-on-year drop in the index since January. The housing market has
been struggling since home buyer tax credits expired earlier this
year. To take advantage of the tax credits, buyers had to sign
purchase contracts by April 30.
“The (housing) double dip is almost here [there was no double dip, just a result of .GOV bubble blowing]
, as six cities set new lows for the period since 2006 peaks. There
is no good news in October’s report,” said David Blitzer, chairman of
the index committee at S&P.
Eighteen of the 20 cities showed weaker year-on-year readings in October and all 20 cities showed monthly price declines.
Unadjusted for seasonal impact [in other words, closer to the truth], the 20-city index fell 1.3 percent in October after a 0.8 percent decline in September.
To begin with, the Case Shiller index is
highly flawed in tracking true price movement in a downturn such as
this since said downturn is being led mostly by elements that the CS
index purposefully omits. This means that those price drops that are
being shown by the Case Shiller index are actually highly optimistic
and seen through spit shined rose-colored glasses. The reality is a tad
bit uglier. See ??The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression as well as Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
I discussed my thoughts on the Case
Shiller index (a complex statistical construct that excludes many of
the factors currently dragging on the housing market) being quoted in
the mainstream media as if it was the S&P 500, its shortcomings,
the true state of housing sales value in America and what’s in store
for the near future. 
Several times last year I stated that
most of the big banks were being much too optimistic in their forecasts
and releasing of credit loss provisions – see As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves.
You see, the mortgages currently on the books are worth even less as
the collateral continues to depreciate, and it is exacerbated by the
robo-signing problems.
I commented on what I perceived to be JPM management’s overt optimism on CNBC as well. Well, in hindsight, was a brother correct? Now, back to that Bloomberg article…
Litigation “ain’t going away,” Chief
Executive Officer Jamie Dimon told analysts on an Oct. 13 conference
call. “It’s becoming a cost of doing business.”
At least JPMorgan’s shareholders are
more likely to be informed about legal expenses than some other bank
investors. The bank, which used the word “litigation” about 50 times in
its latest 10-Q filing with the Securities and Exchange Commission,
discloses more about lawsuits’ effect on results than Citigroup or Wells
Fargo, and has been taking larger reserves than some rivals, according
to company filings.
You know, the interesting part of this is that
JP Morgan’s Analysts Agree with BoomBustBlog Research on the State of
JPM (a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call
Statements Monday, October 18th, 2010
As I sit in the car, surrounded by thick NYC traffic, on my way to the highly anticipated CNBC interview (the Squawk on the Street show)
on JP Morgan, banks, real estate and related issues, guess what I
happen to drive by… MORE construction – causing me to ponder what
additional damage will be done to banks that backed these deals. Then,
less than an hour later I read from CNBC and Bloomberg
that JP Morgan’s analysts predict that forced repurchases of soured
U.S. mortgages may be the “biggest issue facing banks”. Bloomberg goes
on to state:
Future losses from repurchases of
home loans whose quality failed to meet sellers’ promises will likely
total $55 billion to $120 billion, or potentially $10 billion to $25
billion for the next five years, the New York-based mortgage-bond
analysts led by John Sim and Ed Reardon wrote in a Oct. 15 report.
I immediately blurt out, “Now hold the
hell on a minuted!!!” That report of the 15th sounds an awful lot like
the article I published on the 12th, “The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf
2008!” (Hey, no peeking, no copying, fellas!) which, among many other things, reiterated what I said in the 4th quarter of LAST YEAR!!!.
To be fair, the JP Morgan report is very similar to mine in content, scope and gist – JUST A YEAR OR SO TOO LATE! I quote (again) “Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results”…
Warranties of representation, and forced repurchase of loans
JP Morgan has increased its reserves
with regards to repurchase of sold securities but the information
surround these actions are very limited as the company does not
separately report the repurchase reserves created to meet
contingencies. However, the Company’s income from mortgage servicing
was severely impacted by increase in repurchase reserves. Mortgage
production revenue was negative $192 million against negative $70
million in 3Q09 and positive $62 million in 4Q08.
Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud.
I expect this activity to pick up significantly, and those banks that
made significant use of brokers and third parties to place
mortgages will be at material risk – much more so than the primarily
direct writers. I’ll give you two guesses at which two banks are
suspect. If you need a hint, take a look at who is increasing
reserves for repurchases! JP Morgan and their not so profitable
acquisition, WaMu!
With that being said, I actually do believe that JPM is in better
shape than many of its peers. I don’t know if that’s a good thing,
though.
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What's the point of financial analysis anymore? Reggie's going to have to learn of animal husbandry or how to farm (as will we all).
Congress will bail out all banks, whether taxpayers get pissed about it or not. And the whole U.S. (and world) economy will come crashing down when servicing the debt crosses the Rubicon of our ability to pay the minimum balance due. Oh wait, that already happened.
All I ask is that we kill the bankers first when the time comes.
We can only hope big banks are the new tobacco...but just like big tobacco, they are likely dabbling in all sorts of illegal activity to keep it going as long at they can.
Wall Street, just like tobacco, parasites leaving death and destruction behind them...
At least the tobacco companies were up front about taking your money. The financial sector basically forced you to smoke while fleecing the general public.
Reggie, your title hits it right on the mark.
Great way to explain it to those that can't figure out why they have debt-tumors all over their lives.
Reggie... Love Ya Man! you can keep your BudLight... Great work as always, not many people want to know the truth, shit not many people can understand the truth... but God Bless You! for taking the time to make it simple for the stupid!
My very best to you and yours Reggie this New Year, JW
"Obama Names JPMorgan's William Daley as Chief of Staff"
http://www.bloomberg.com/news/2011-01-06/obama-names-jpmorgan-s-william-...
Panic over the cavalry has arrived
There is no more securities class action bar, they all became securitization lawyers. :-(
Wow... I can picture the future "black labels" that government requires on all bank documents:
(Warning: The Financial General has found that working with banks can cause extreme financial,emotional hardship and/or lead to a horrible death)
Now that is a warning label I would gladly give my tax dollars for!!!
Now that is a warning label I would gladly give my tax dollars for!!!
You already have but they failed to deliver the stickers...
Reggie what are your thoughts on the viability of Max Keiser's crash JPM buy silver campaign putting much pressure on them?
is it hurting them? could it be a contributing factor ?